Question:

(a) The demand for the output of a certain company is very elastic and modern plant recently installed is capable of greatly increased production. Output at present is 80,000 units per year, and 500,000 units are estimated to be within the capacity of the new plant. The present selling price per unit is Rs 15. The need for flexible budgeting is recognized and six alternative levels of output in addition to the present level are contemplated. Six equal increments in annual output level, up to a maximum of 500,000 units, would involve corresponding reductions of Rs 1 each in unit price to Rs 9 per unit at the maximum output. The present variable costs amount to Rs 400,000. Fixed costs which at present amount to Rs 200,000 are not expected to increase for any of the six alternative output levels contemplated. Semi-fixed costs are expected to vary from the present annual figure of Rs 230,000 to Rs 320,000, the upward steps being to Rs 260,000 at 220,000 units, Rs 280,000 at 360,000 units and Rs 320,000 at 500,000 units.

(a) Prepare the flexible budget and identify the volume which should be set for the budgeted output.

(b) Explain why the preparation of the budget is a collective responsibility.